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Mortell v. Insur. Co. of N. America





Appeal from the Circuit Court of Cook County; the Hon. Arthur L. Dunne, Judge, presiding.


Rehearing denied January 23, 1984.

Plaintiffs, Richard Mortell, Alan Freeman, Leslie Rosenthal and Robert Myron, four partners doing business as Rosenthal & Company, appeal from a summary judgment entered against them in the trial court. Plaintiffs (hereinafter referred to as Rosenthal) had sought a declaratory judgment adjudicating their rights under two fidelity bonds issued by defendant, Insurance Company of North America (hereinafter referred to as INA). Plaintiffs sought a declaration that $2 million in losses, representing customer claims, the defense of those claims and the defense of an action by the Commodities Futures Trading Commission (CFTC) were covered by the bonds. Summary judgment against plaintiffs was entered on all but one of the claims, and defendant, INA, cross-appeals from the $133,000 judgment on the allowed claim.

The issues presented for review may be summarized as follows: (1) Whether summary judgment was proper with respect to claims discovered by the insured prior t the January 8, 1977, amendment to coverage in light of the alleged factual issue of timely notice to the insured of these losses; (2) Whether the January 8, 1977, amendment to coverage was valid and enforceable with respect to claims the insured delivered after this date; (3) Whether the policy clause which excludes coverage for losses resulting from acts of the insured's partners releases the insurer of any obligation to indemnify the insured for attorney fees spent in defending the CFTC action.

On cross-appeal, two issues are raised: (1) Whether the allowed claim was barred by failure to provide timely notice as required by the bond; and (2) Whether the trial court erred in entering a judgment in excess of the bonds $50,000 limit per occurrence.

Rosenthal is a licensed futures commodity merchant. In January 1975 Rosenthal procured two fidelity bonds from INA. The policies remained in effect until cancelled by INA on July 8, 1978. During the time the bonds were in effect Rosenthal paid INA $66,479 in premiums. The bonds, entitled Brokers Blanket Bonds, provided indemnity to Rosenthal for losses suffered as a result of dishonesty of their employees, and also as a result of forgery, theft and other such acts.

The record discloses that in March 1975 plaintiff hired a certain Richard Taylor to become manager of its Dallas branch office. Soon after being hired, Taylor expressed interest in selling London commodities option contracts through the Dallas branch office. Taylor had sold these options in his previous position as manager of the Dallas branch of another commodities broker. Because at the time there was a question as to whether the Texas Securities Commissioner would allow these options to be sold in Texas, plaintiffs opened offices in other cities throughout the country to market London commodities options. Between July 1975 and early spring, 1976, plaintiffs opened approximately 20 branch offices under the name "Rosenthal & Company, Taylor-Grant Division."

In May 1976, plaintiffs learned that the CFTC was investigating the Taylor-Grant Division's marketing of London commodities options. The CFTC is a Federal agency organized to regulate the commodities industry. (See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran (1982), 456 U.S. 353, 72 L.Ed.2d 182, 102 S.Ct. 1825.) Under the Commodity Exchange Act (7 U.S.C. sec. 1 et seq. (1976 & Supp. IV 1980)) the CFTC may initiate investigations of and file complaints against commodity professionals and provide a reparations procedure for customer claims based upon violations of the Act. Complaints may be heard before an administrative law judge or by way of application for an injunction in the Federal district court or both. (7 U.S.C. secs. 9, 13a-1 (1976).) The CFTC investigation resulted in the CFTC filing a complaint for injunctive relief in the United States District Court of the Northern District of Illinois in October 1976. The complaint named Rosenthal, its general partners and certain of its employees as defendants. In April 1977, the CFTC filed an administrative complaint containing the same allegations against the same defendants. The CFTC alleged that each of the defendants had engaged in cheating, defrauding and deceiving purchasers or prospective purchasers of London commodity options in violation of the Commodity Exchange Act and regulations thereunder (7 U.S.C. § 6c(b) (1976); 17 C.F.R 93269). The CFTC complaint specifically charged that the defendants had engaged in or had directed and caused company salesmen to engage in a high pressure sales campaign conducted by repeated, unsolicited long distance telephone calls to persons who were inexperienced as to London commodity options transactions. These persons were told false and deceptive statements about profit expectations of London commodity options and were deceptively urged to purchase options immediately to take advantage of a purported favorable market price for such options.

The CFTC further alleged that defendants had hired and directed numerous salesmen who lacked knowledge of the risks and trading mechanics of London commodity options. Defendants provided these salesmen with glowing, but deceptive and misleading, "canned" sales speeches to read over the telephone to prospective customers. Defendants instructed these salesmen to provide only minimal information, to conceal material facts and to avoid unfavorable explanations concerning the recommended purchase of such options. In addition, the complaints alleged that the defendants have directly or indirectly concealed and misrepresented the true nature of the purchase price, including all fees and mark-ups, which customers pay to the company for the purchase of options and concealed the fact that the company marks up the price of each option purchased from the London markets from between 40% and 150%.

The initial complaints filed by the CFTC requested only that Rosenthal be enjoined from engaging in the fraudulent and deceptive selling practices allegedly employed in their marketing of London commodity options. In April 1978, the CFTC amended its Federal court complaint to seek disgorgement of all options, premiums, salaries, commissions and mark-ups received by defendants from their commodity options customers in the amount of $55,143,389.

An evidentiary hearing was held before an administrative law judge for the CFTC between May 1979 and January 1980. Thereafter, the parties submitted briefs and on November 21, 1981, the administrative law judge rendered his opinion finding that the evidence failed to establish that the defendants had violated the Commodities Exchange Act or Commission regulations as alleged. Two months later the Federal district court dismissed the CFTC complaint without prejudice "for want of equity."

A number of customers also filed complaints against Rosenthal alleging that Rosenthal salesmen made false or deceptive statements or withheld material information regarding London commodity options. These customers sought rescission of their transactions with Rosenthal pursuant to the Commodity Exchange Act (7 U.S.C. § 6b (1976)). The record does not show when the various claims were filed nor does the record show what the allegations in each complaint were. The parties have indicated that the claims arose between 1976 and 1978 and involve similar allegations of salesmen's dishonesty. Rosenthal has also stated that many have been settled or resolved through litigation.

The record reveals the following transactions between INA and Rosenthal. Soon after the Federal lawsuit was filed by the CFTC, members of Rosenthal's staff met with its insurance brokers and INA to discuss the lawsuit. At that time a copy of the CFTC complaint was provided to INA. On January 8, 1977, INA requested Rosenthal to sign an amendment to the broker blanket bonds then in effect. Rosenthal signed that amendment. The premiums due on the bonds were neither increased nor decreased. On July 26, 1977, INA notified Rosenthal of its intention to cancel the fidelity bonds. Discussions between INA and Rosenthal ensued, following which INA withdrew the cancellation notice and the bonds remained in full effect. When the CFTC amended their complaint to request disgorgement of monies received by Rosenthal from its commodity options customers, additional meetings between INA and Rosenthal were held. At these meetings Rosenthal discussed not only the amended CFTC complaint but also numerous customer complaints which had been filed against Rosenthal. Rosenthal provided INA with a list of the customer complaints and gave INA unlimited access to Rosenthal's files on these complaints. After reviewing Rosenthal's files, INA cancelled the fidelity bonds effective July 8, 1978. This action followed.

Rosenthal filed a complaint in the circuit court of Cook County seeking a declaratory judgment adjudicating the rights and duties of the parties under the broker's blanket bonds and requested a hearing to determine the sums due Rosenthal on the bonds.

The trial court granted INA's motion for summary judgment on the issue of whether the claimed losses were covered by the fidelity bonds. With respect to the affirmative defenses raised by INA, the court ruled that whether there was timely notice was an issue of fact not necessary for the disposition of this case. Additionally, the court ruled that one claim, the claim of Marie Auditore, was covered by the bonds and the court ...

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